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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.31%), S&P (0.44%), Nasdaq (1.70%), Russell 2000 (3.11%)

May 1, 2015

Overview:

  • The major US equity indexes finished lower this week, though sector performance was mixed. One of the bigger stories was largely outside of stocks with some unwinding of crowded macro trades. There was a notable backup in Eurozone bond yields led by German paper that weighed on Treasuries and was accompanied by a big rally in the euro. 
  • In addition, oil extended its recent recovery, helping energy stocks. There was also some focus on a selloff in biotech, small-cap underperformance and pockets of relative strength/weakness in rate-sensitive names. The bulk of the outsized moves this week occurred despite a specific catalyst and there were few meaningful shifts surrounding the key narratives. 
  • European data highlighted some initial traction from ECB policy support, while prospects for a Greek deal looked better. The US growth slowdown received more attention following a soft Q1 GDP print, though so did the more transitory headwinds.This theme was highlighted in an FOMC statement that while largely in line with expectations, also reinforced policy uncertainty. 
  • Another very busy week of earnings seemed to have little impact on broader market sentiment as macro takeaways remained little changed. M&A, corporate actions and shareholder activism continued to drive some notable moves. Healthcare, consumer discretionary and utilities were the worst performing sectors. Materials, energy and telecom outperformed. 

Macro trade unwinds:

  • Macro trade unwinds grabbed a lot of the attention this week, though the read-throughs for equity sentiment were not straightforward. Most of the focus was on the big backup in core Eurozone bond yields, particularly Germany. The yield on 10-year German paper jumped over 20 bp to ~0.36%, after trading as low as 0.07% early in the prior week. There was no single factor behind the move, leading to thoughts it may have been much more a function of crowded trades stemming from the early exuberance related to the launch of the ECB’s QE program. Common excuses revolved around some signs of early traction from aggressive monetary policy, bearish calls from a few high-profile investors, hints of reform concessions out of Greece and supply pressures. The move was accompanied by a ~3% rally in the euro against the dollar. This seemed to act as a headwind on Eurozone equities, another consensus long. In terms of some other high-profile trades this week, China continued to outperform on policy support expectations. The Shanghai Composite gained 1.1%, finishing up for an eighth straight week. Oil extended its recent rebound with WTI crude up 3.5% despite skepticism about the fundamental backdrop. Some support came from better inventory data. Dampened dollar momentum was cited as well and may have also played a role in the underperformance of small-cap stocks. 

Q1 GDP highlights US growth slowdown:

  • The US growth slowdown was in focus as GDP grew just 0.2% in Q1 after a 2.2% expansion in Q4, below consensus expectations for a 1.0% increase and the weakest reading in a year. As expected, weather, dollar strength, the West Coast ports slowdown and weaker energy prices were the widely cited headwinds. International trade turned out to be a much bigger drag than expected, subtracting ~130 bp from growth. In terms of the energy dynamic, most of the focus was on a 48.7% decline in mining shafts and wells that drove a 3.4% contraction in nonresidential fixed investment and subtracted ~50 bp from the headline number. Personal consumption slowed to 1.9% from the 4.4% growth seen in Q4. While this was a bit better than expected, it still generated some cautious commentary given the energy and labor market tailwinds. Despite the downside surprise from Q1 GDP, there were few signs of any meaningful growth scares in the market. This fit with the transitory nature of some of the pressures, while economist commentary continued to talk up the prospects for a near-term rebound. Goldman Sachs noted a strong fundamental case for a pickup in consumer spending growth given gains in real disposable income and consumer sentiment. 

No surprises from Fed:

  • There were few notable changes from the Fed this week. As expected, the statement acknowledged the weaker growth backdrop in Q1, but also put some of the blame on transitory factors and maintained the assessment that the economy will continue to expand at a moderate pace. Labor market commentary was downgraded to note that underutilization was little changed. The statement also highlighted some softening in business investment, exports and household spending. However, the latter was offset to some extent by what economists described as some unusual commentary from the Fed pointing to high levels of consumer sentiment. There were only some minor tweaks in the language surrounding inflation. In terms of policy guidance, the statement reiterated that liftoff remains dependent on further improvement in the labor market and reasonable confidence that inflation will move back to the Fed’s 2% objective over the medium term. This kept an uncertainty and volatility dynamic in play with the debate about the extent to which the market has already pushed back on liftoff and whether data surprises going forward should have more impact on the timing of an initial rate hike or the aggressiveness of subsequent moves. 

Notable earnings decliners:

  • AAPL (1%) lagged despite a strong March quarter on the back of an upside surprise from iPhone shipments. However, sentiment was extremely elevated into the print and the increase in the capital return program only seemed to be in line with expectations. WYNN (13.4%) was a big decliner on Macau weakness and cautious comments surrounding Las Vegas trends. In the steel space, a guidance reset weighed heavily on X (13.1%). BWLD (12.8%) lagged the restaurant group on concerns about softer comps, higher labor costs and the need for lower wing costs in 2H to hit full-year guidance. FX headwinds and a weaker demand backdrop in Brazil forced WHR (8.7%) to cut its 2015 EPS guidance by ~14% at the midpoint. Social media stocks TWTR (25.5%), LNKD (21.4%), and YELP (21.4%) all saw big post-earnings selloffs, with most of the focus on lower guidance. SPW (3.2%) slashed its organic growth outlook on the headwinds from softer O&G capex and weakness in power generation. A disappointing 6% decline in NA industrial orders was a factor in the weaker guidance from PH (1.5%). In managed care, HUM (8.8%) missed EPS for a third straight quarter as a higher MLR in both the retail and group segments offset a better SG&A performance. 

Notable earnings gainers:

  • A combination of low expectations and strong cost control helped drive the outperformance in drilling names such as ESV +13.9% and NE +11.6% XOM +2.2% was underpinned by strong refining margins and E&P production upside. ROK +8.1% was a bright spot in the industrials on better organic growth and reiterated EPS guidance despite incremental FX pressure. UPS +3.3% also reaffirmed guidance, while the Street was positive on the margin performance in its International segment and better pricing in Ground. GPRO +11.7% guided above the Street on continued brand momentum. A beat and raise on strength in its semi test business boosted TER +10.4%. MDLZ +5% beat on better gross margin and organic growth, while also reaffirming guidance despite a bigger FX headwind. Gross bookings strength with help from improving hotel room nights was the key positive takeaway for EXPE +2.8%. Better than expected 15% constant currency growth and commentary surrounding broad-based customer, product and geographical demand underpinned WAT +2.5%. Strong HCV franchise performance was the big tailwind for GILD +1.3%. 

M&A and activism headlines drive some notable moves:

  • It was another fairly busy week in terms of M&A, corporate actions and shareholder activism headlines. The saga in the pharma space continued as MYL (2.9%) rejected the unsolicited expression of interest from TEVA (3.5%), but continued to be rebuffed by PRGO (3.4%). The semi sector was back in focus on Friday following a NY Post report that ALTR +11.9% is likely to renew talks regarding a takeover by INTC +4.2%. Reuters also highlighted the possibility that INTC could go hostile next month. However, AMAT (8.4%) came under pressure after it was forced to scrap its $10B+ deal with Tokyo Electron due to antitrust issues. The other big story in tech revolved around speculation that CRM +8.2% had received takeover interest. ORCL +3% denied it was the suitor, while Bloomberg reported on Friday that SAP +1.6% was interested. Bloomberg also reported that MON (0.02%) approached SYT +13.1% about a merger nearly a year after a previous attempt at a deal fell apart. There were multiple rumors surrounding potential tie-ups in the cable and media space with TWC +1.3% and CHTR +0.9% in most of the headlines. In terms of potential activism, YUM +5.5% was boosted by news on Friday that Third Point had acquired a significant stake. 

Sector performance mixed:

  • The materials sector outperformed this week on fairly broad-based strength. Copper and aluminum names like FCX +13.6% and CENX +11.9% were some of the standouts. Precious metals equities also had a good week with the GDX +4.7%. Energy was underpinned by the continued rebound in oil and a lower bar for earnings. Defensive positioning throughout the better part of the week seemed to help telecom. Banks drove some of the outperformance in financials with the BKX +1.6% helped by the backup in rates. This dynamic weighed on other pockets of the market, including REITs with the RMZ (3.1%). Utilities also lagged, as did the builders. Machinery helped the industrials finish slightly higher despite a pullback in the Transports (1.6%) led by truckers and airlines. Tech ended a bit lower on the week. Earnings seemed to be a much bigger driver of the price action than macro. Consumer discretionary was a notable underperformer. Retail lagged with the RTH (2.7%). Some of the selling pressure was chalked up to the continued rebound in oil. Restaurants and gaming stocks also weighed. Healthcare put in the worst performance this week. Another wave of selling pressure hit biotech with the BTK (5.2%) despite a 3%+ bounce on Friday. 

Sector Performance (vs S&P 500):

  • Outperformers: Materials +1.95%, Energy +1.13%, Telecom +0.86%, Financials +0.35%, Industrials +0.03%, Tech (0.08%) 
  • Underperformers: Healthcare (2.29%), Consumer Disc. (1.61%), Utilities (1.59%), Consumer Spls. (0.71%)
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